Clicking With New Customers
The price of business success in today’s China is not just exposure to hubris or a humbling by a powerful official. It can be simply a function of your big footprint making you a proxy for China itself. In a year of slowed economic growth and apprehension that things could get worse, few are more visibly in this spot than Zhang Jindong and his retail-driven Suning empire.
That–along with more competition–explains why Zhang the merchant is pushing ahead ever harder even as Zhang the billionaire is decidedly diminished in this year’s accounting of China’s Richest. We figure the housewares tycoon’s net worth has dropped 43%, to $3.2 billion.
In a tandem interview with FORBES ASIA and the licensed FORBES CHINA, Zhang expresses frustration that the stock plunge reflects any financial risks at his flagship store chain. “Suning Appliance has no problem of financial risk,” he says. “Do you think I’m risky? I’m definitely not risky.”
Much has changed since late 1990 when 27-year-old Zhang opened his first appliance store at the intersection of Jiangsu and Ninghai Road in historic Nanjing. Suning–named after the “su” in Jiangsu and “Ning” in Ninghai–back then mostly sold air conditioners.
Today Suning nationwide has 1,700 stores and offers shoppers a million items. Its $15 billion in annual sales has made Zhang the king of electrical-appliance retailing in China. Even with his lessened fortune, he is the 13th-wealthiest Chinese. Far from downtown Nanjing, Zhang these days oversees his interests from a lush commercial park where the memory of that first store is preserved in a museum.
Suning’s conquest of the mainland market was swift, if not complete and still subject to disruption. It repelled most Western inroads–even at a lessened market capitalization of $8 billion, Suning well exceeds onetime global champBest Buy ($5.7 billion). More fundamentally, Zhang took on the early domestic leader in appliance sales, Gome, and now has it pinned firmly in the runner-up role. In the lunch session at his headquarters, Zhang cheerfully reminds me of a question I asked during my last sit-down with him six years ago, about how he would catch up with Gome. “That’s all over,” he smiles.
Yet the marketplace is changing by virtue of technology that is raising the stakes higher for Suning: Internet commerce. China is on track to surpass the U.S. as the world’s largest online retail market by 2015, Boston Consulting Group (BCG) said in a report late last year. Domestic companies started after Suning such as Alibaba, Dangdong and 360buy dominate the field and want Zhang’s customers. Another potential threat, Wal-Mart, in a bricks-and-mortar joint venture in China since 1996, has deepened its e-commerce play with this year’s acquisition of a majority stake in e-retailer Yihaodian.com.
Heated battles among that group and others are lowering margins. It hardly helps that China’s official GDP growth isn’t likely to make 8% this year and could dip below 7% next year, after a long stretch above 10%, and that much of the slowdown has come in residential real estate and therefore the kind of household formation that would galvanize this retail sector.
Yet Suning is on the attack; Zhang, now 49, told FORBES ASIA he wants e-commerce revenue to total $3.2 billion this year and “at least” $6.4 billion next year–better than 40% of last year’s online and offline sales combined. “I’m still not old. I still have an opportunity to give everyone a look” at what Suning can do online, he vows. “If I wait and think about it when I’m old, will the opportunity still be there?”
Acquisitions are a way to push ahead, Zhang said. Just in September Suning paid $66 million for mainland website Redbaby, a supplier of infant and maternal goods. It sounds far from Suning’s traditional mix, but Zhang wants to overhaul that image and become more of a mass merchandiser akin to Wal-Mart or Amazon.com. “Suning from a management concept and technology point of view isn’t simply an appliance company,” he says. Besides adding a wider range of products online, Suning in September introduced a new bricks-and-mortar chain, Suning Expo Stores, that will sell everyday items. It plans to open 20 by the end of this year and 400 within three years.
Zhang can talk big if only because he has the money to back it up. Flexing its remaining financial muscle, Suning in July raised about $750 million in a stock sale, with about three quarters of the Shenzhen-listed shares bought by Zhang-owned Nanjing Rundong Investment. (He also has a quiet real estate operation.) Shortly afterward Suning upped the ante by announcing a $1.3 billion domestic bond sale. “We need to quicken our ability to develop,” Zhang says of his thinking.
Other investors aren’t feeling as bold. Concerns were affirmed in a flash interim report in July when Suning said first-half profit dropped by 29.5%, to $277 million, as sales increased a tepid 6.7%, to $7.5 billion. “Sell,” suggested a subsequent report by brokerage CLSA in tough language. Yet Zhang wasted no time hitting back at doubters. Suning Appliance Group, 28%-owned by Zhang and the second-biggest shareholder of Suning Appliance, said it would purchase up to $159 million of the company’s shares in the next three months. As of this summer Zhang directly or indirectly owned nearly 40% of Suning Appliance.
For all his means, Zhang cannot orchestrate the great Web upheaval. China had 457 million Internet users at the end of 2010. That year 145 million of them were e-commerce shoppers, a figure that will rise to 329 million by 2015, or about the total population of the U.S., according to BCG. The company projects that 7.4% of retail spending in China will be online in 2015, and, in a story familiar to automakers, surpass the U.S. with sales of $317 billion.
Little happens in a big way in China without government support, and the state is encouraging e-commerce. Authorities are encouraging Web domain-name protection, online consumer rights and startup activity.
Policy aside, the same trends that Zhang identified as likely to buoy his business two decades ago are fueling e-commerce today: rising income and urbanization. Back then every household in China wanted four items–a refrigerator, a TV, a washing machine and a cassette music player. Today a better-off generation of Chinese consumers wants it all. Suning has strong ties with many of the world’s largest suppliers of gadgets, as well as white goods companies like Whirlpool. Adding to the online potential: Traditional retailers can’t expand fast enough to serve everyone, especially in second-tier cities, creating opportunities for online growth, BC Group says. Notwithstanding the current slowdown, growth in Chinese consumer spending should be good for at least another ten years, before the market begins to mature, says Zhang.
But others share that awareness. Old nemesis Gome is still in the fight (it made FORBES ASIA’s Fabulous 50 big companies list as recently as last year–Suning hasn’t appeared since 2010.) But it has been wracked by ownership disputes and especially by the prolonged imprisonment of founder Wong Kwong Yu (still No. 78 on China’s Richest). Gome acquired an online unit this year, but that may only yield net losses.
In e-commerce, the early giant is fellow billionaire Jack Ma’s Alibaba, with 57% of the online trade. The company’s Tmall.com works in part like an online mall where vendors “inside” sell directly and deal with their own logistics. It’s an “asset-light” approach that reduces Alibaba’s risks. Zhang says he respects Ma’s pioneering spirit. Yet Alibaba has had to fight criticism that it goes too easy on companies selling fakes.
Number two to date is 360buy of Beijng, founded by Liu Qiangdong and backed by Digital Sky Technologies, which was also a pre-IPO investor in Facebook. Sales growth has been fast, but losses have piled up; new competition by Suning may most hurt 360buy. A U.S. IPO has been discussed but has not happened. “I think Suning will be a strong rival to 360buy,” says Apple Su, who follows e-commerce at iResearch in Beijing. Yet prolonged, “irrational” price-cutting could also potentially “cripple” the industry and harm everyone, says Gary Rieschel, founder of Qiming Weichuang Venture Capital in Shanghai.
Suning is likely to make online inroads in part because of what it already brings to the battle. Not to be overlooked, it has good ties to the government. An introduction to the company at headquarters notes some 9,000 employees are Communist Party members. On the business side, it boasts more than 80 million regular customers who look to it for electronics products.
“In business, every phase of things counts,” says Zhang. “Companies that just yell out a low price today to win business aren’t going to make money in the long term,” he says. Backed up with technology support from IBM, Suning is also trying to find ways to link his stores to his website to lead in the “online-to-offline” complement that few companies seem to have mastered globally.
Ultimately Zhang thinks e-commerce customers will want service, just like they did when he was selling ACs back in the 1990s. “When I started selling air conditioners early on, customers were willing to pay an extra 200 yuan to buy from Suning,” he said. “Why? Service was good.” Zhang suggests that although in China’s raging e-commerce battles today, “no one praises service,” service still matters. To that end, Suning plans to be adding a 1,000 customer call-in service staffers to its 180,000 employees in the current second half of 2012. BCG agrees with that emphasis. “Websites able to meet the need for better quality and service will win in an increasingly competitive online environment,” it says.
Yet Suning has its challenges, too. Many of its products are available elsewhere, so it will be helpful to source more of its own, like it is doing with Redbaby. And the gathering Web free-for-all is the ultimate example of the Chinese expression, “Fortune and disaster come together.”
The same could be said about swings in personal fortune: The last time Zhang’s took a dip along with China, in 2008, he saw Suning’s share price double in the following year. Such a rocketlike recovery will be harder now, given greater size and broader battle lines. But still shy of 50, the guy who thought he could crack the air-conditioner trade is up for any young man’s game.